Australia and Russia treaty - key points
The first tax treaty between Australia and Russia was signed on 7 September 2000. The treaty also includes a Protocol which was signed at the same time. The following is a summary of the key features of the treaty.
Date of effect
- For withholding taxes, the agreement has effect in relation to payments made on or after 1 July 2004.
- For other taxes covered, the agreement has effect in respect of income, profits or gains of years of income beginning on or after 1 July 2004.
- For all taxes, the agreement has effect for taxable years and periods beginning on or after 1 January 2004.
Taxation of business trusts
In relation to the Business Profits Article, a provision is included in the Protocol1 to the treaty to ensure that profits derived by a non-resident beneficiary through a permanent establishment of a trust can be taxed in the country where the permanent establishment is located.
The treaty lowers its general rate limit of 15%2 for source country taxation on dividends to a rate of 5% where:
- the dividends are franked (are paid out of profits which have borne the normal rate of company tax)3 and are flowing to a company which directly holds at least 10% of the capital of the paying company and the investment in that company is at least A$700,000 (or the equivalent in Russian Roubles).
For dividends flowing from Russia to Australia, the 5% rate limit will only apply where the dividends are exempt from tax in the hands of the Australian shareholder. This restriction ensures that the full benefit of any reduction in dividend withholding tax flows to the investor4.
The treaty limits source country taxation on interest to 10%, which is consistent with the general rate of interest withholding tax applicable under Australia's domestic law.
The treaty limits the rate of source country taxation of royalties to 10%, which is a reduction from the domestic rate of 30%. Payments for the use of industrial, commercial or scientific equipment and radiofrequency spectrum licences are treated as royalties for the purposes of the treaty.
The treaty includes a comprehensive Alienation of Property Article for the taxation of gains from the alienation of property. In accordance with Australia's current treaty practice, this Article includes a source country sweep-up provision that allows the source country to tax capital gains not otherwise dealt with in the Article. Australia will thus continue to be able to tax, for instance, capital gains derived by Russian residents on the disposal of Australian entities. Although the first four paragraphs of this Article only refer to 'income or profits', the Protocol5 to the treaty explains that for Australian purposes these terms include capital gains.
Unlike the approach taken in most of Australia's treaties, the scope of what is considered 'governmental functions' for the purposes of the Income from Government Service Article only includes core activities of government (police, defences, foreign affairs, judiciary). Government service pensions are dealt with in this Article, rather than the Article 18 (Pensions and Annuities).
A special rule, usually contained in the Source of Income Article in other Australian tax treaties, is included in the Protocol6 and applies to the whole treaty. This rule deems income, profits or gains derived by a resident of one country, which under the treaty may be taxed in the other country, to have a source in the other country. This rule also ensures that where an item of income, profit or gain is taxable in both countries, relief from double taxation will be provided by the recipient's country of residence for tax levied at source (see Article 22 Methods of Elimination of Double Taxation).
Limitation of benefits
Article 23 (Limitation of Benefits) ensures that income or profits will not be given treaty benefits where it is preferentially taxed7 and information relating to it is granted greater than usual confidentiality. The Article specifically refers to activities giving rise to income or profits which receive such preferential treatment, but also refers generally to any other activity where a substantial presence is not required in the country where the income is sourced.
What to read/do next
Further information relating to this and other Australian Tax Treaties can be found on the Treasury Website
Visit the International tax agreements homepage
1 See Protocol item 5(c).
2 Note: Australia's domestic law dividend withholding tax rate of 30% is thus reduced by the treaty.
3 However, Australia's domestic law does not subject fully franked dividends to withholding tax and as such, Russian shareholders will receive these dividends free of any withholding tax whilst this remains a feature of the Australian domestic law.
4 Russia is now listed as a comparable tax country on the limited exemption list under Australia's controlled foreign corporation regime. As a result inter-company non-portfolio dividends flowing from Russia are exempt dividends in Australia (under s23AJ of the Income Tax Assessment Act 1936), this satisfying the requirement to receive the lower 5% rate of withholding tax.
5 See Protocol item 1(b).
6 See Protocol item 1(a).
7 For the purposes of the provision, preferentially taxed means income or profits which are exempt from tax, or subject to a lower than normal rate of tax or are receiving other benefits in relation to that income or those profits (other than by reason of the application of other Articles of the tax treaty).